Why Sun threw in the towel in Mankind vs. Microsoft

Analysis Principles are fine things to have, but only if you can afford them. With its stock declared a 'junk bond' and finishing a terrible quarter, Silicon Valley's leading Microsoft antagonist Sun Microsystems has now decided it can't.

The news will have surprised the company's lawyers, who only this week were girding themselves for the next round of litigation. It appears that for almost $2 billion, Microsoft has bought its way out of a lot of trouble. In truth however, both parties realized that the EU decision, which is still pending appeal, was a watershed. Microsoft doesn't have any more nasty surprises to face from the US, EU or States, and Sun realized that it couldn't push any more severe penalties out of the process. What could Sun achieve by proceeding with its 2002 lawsuit? The lawsuit asked for $1 billion in damages; today's settlement yields Sun $700 million for antitrust issues - less than what it wanted - and a further $1,250 million covering patent royalties - which is more than what it wanted.

But the hardest thing for Sun to swallow will be its pride. McNealy had presented the fight in apocalyptic terms: Mankind vs Microsoft.

Late last year in closed door hearings, Sun lawyers denounced Microsoft's new protocol licensing program as ineffective. Now Sun has become the biggest licensee of Microsoft protocols, giving the program credibility it lacked. Sun had testified how Microsoft torpedoed Project Cascade - which was based on a widely licensed piece of software from AT&T called Advanced Server for UNIX, which was itself based on Windows source code. When Sun wanted to buy the product outright, Microsoft broke its agreement with AT&T and cancelled the source contract. That was illegal, of course, and AT&T collected a cash settlement, but it has reflected the tone of Microsoft's legal strategy. If found guilty, Redmond can always buy its way out of trouble.

Caldera picked up the Digital Research suit against Microsoft and sought $1.6 billion in damages. DR-DOS had as much as any competitor could hope for: a clearly superior, compatible product that cost OEMs less. In the end Microsoft settled for $155 million damages. Clear cut cases brought by Bristol Technology and Be Inc. were settled before they even reached the courtroom. Microsoft's deep pockets bought the company plenty of patience. Despite a catastrophic verdict in the Federal Antitrust trial, Microsoft simply waited for the installation of a new regime at the Department of Justice more interested in punishing public nudity and file sharing than unethical business practices. When the individual States revolted at the settlement, Microsoft simply waited until the recession induced cash crises bought the States' attorneys back to the table. Microsoft's greatest stroke of luck was finding an EC competition commissioner more interested in cash than industry dynamics, and even Monti's paltry settlement may still be undone on appeal. Through good fortune and its own green fortune, Microsoft has seen off its severest legal threats. Although Real Networks' case is outstanding, the chapter that began with the FTC's investigation in 1991 is now surely over.

What does Sun stand for, now?
Meanwhile at Sun, staff will be wondering if the company, which defined itself by its opposition to Microsoft, has a reason to exist. It's a task for Jonathan Schwartz, Sun's COO and new Number 2. Sun's pugilism was often characterized as cynical marketing: Sun has always punched above its weight, and even at the height of the Internet bubble was dwarfed by IBM and HP. But not only did executives from McNealy on down really believe their own rhetoric, that rhetoric was largely true. Sun was the only direct competitor in business computing that had the freedom to criticize Microsoft, as it was the only company with an influence on enterprise IT standards that wasn't a Windows licensee.

Let's keep things in perspective. Microsoft's unethical business practices should be put into context. Unlike the pharmaceutical cartel or arms manufacturers, Redmond doesn't overturn democracies or kill thousands of civilians; unlike News Corporation it doesn't debase social discourse or undermine language. Unlike Google, it doesn't pretend to present "all the world's knowledge", when most of the world's knowledge isn't even on the Internet. Microsoft simply makes some fairly mediocre software and charges a lot for it.

But for Sun, which had rose through the ranks of a dozens similar workstation manufacturers through foresight, engineering skill and hard competition, Microsoft's mediocrity is an affront. Few companies can afford Q&A disasters in their core product lines, as Sun knows when it endured a torrid time upgrading its SunOS customers to Solaris. And huge opportunities were lost when Sun failed to execute, such as the potential leadership of the embedded processor market that the Java picochip promised, but couldn't deliver. Thanks to its monopoly position Microsoft can afford to release sloppy software and not worry about the repercussions. This has been a very real culture clash of engineering values. Now Sun has the job of defining what it stands for from scratch.

Microsoft's biggest global competitors are exactly as they were on Thursday: Nokia and Sony, two companies whose core revenues don't derive from Windows and who can set global standards. (IBM has every motivation to fund Linux development, which Redmond really doesn't like at all, but IBM doesn't have the inclination to set standards elsewhere and can't dictate consensus in the OSS space). Not that it's any consolation on Sun's Blackest Friday, but if Mankind had to be represented in an Independence Day scenario, most people would rather it was Sun engineers downloading the Trojan onto the alien's computers, and not Microsoft engineers.